Psychology of Trading – Zen Trading

I’m going to be writing a series of articles here, in the upcoming weeks, on aspects of trading mindset and psychology, and I thought this article might make a good preamble, introduction of sorts, to that series, because it’s about the basic, essential mindset cultivated by successful traders.

Critical to that essential mindset is what the Zen kids call “don’t know mind”. Fortunately for you kids, I happen to be a bit familiar with this stuff, having spent several years of my misbegotten life studying at Taoist and Zen meditation centers, and another few years teaching Zen meditation. (I hate the fact that somewhere along the way I lost my supercool Zen teacher robe – black cotton, with the characters for “Tao” and “Ch’an” embroidered on the back in white. Although I always complained, “I don’t read Chinese – for all I know, that says, ‘Kick me’.”)

“Don’t know mind”, also called “beginner’s mind” (so if you’re a beginning trader, you’re in perfect shape!), refers to the idea that we can only open ourselves to perceive the truth by emptying our minds of any preconceptions we have. Short version: If you want to really know, then first forget what you think you know. Adopt an “I don’t know” attitude. Look at the world with fresh eyes, with vision unclouded by bias, preconceptions, or treasured opinions.

What does that have to do with trading? – Everything!

Why? – Because the simple truth is that when it comes to the currency markets, we don’t know. Oh, we may think that Eur/Usd is headed for 1.4000 (or 1.3000); we may believe that the 1.6820 level in Gbp/Usd will hold as support; we may hold a strong opinion that Usd/Jpy is going to make a new high today…but the truth is that WE DON’T KNOW!

And that’s not just the truth of this present moment, but it’s the truth of every single trading day. We never know how the day’s trading is going to unfold, and in fact it often surprises us. The best traders have a keen awareness of the fact that they don’t know. Therefore, they approach the market every day in much the same way that a Zen kid approaches daily meditation practice – seeking to cultivate a state of “relaxed alertness” and “watchfulness”, as if one were waiting for some very important something to come along or occur, and wanted to be ready to react both instantly and appropriately. (One very entertaining Taoist teacher of mine expressed it this way, “You should sit as if you were waiting to hear your girlfriend arrive at any moment and save you from having to sit in meditation any longer.”)

Interviews with master traders, such as those included in Jack Schwager’s “Market Wizards” series, reveal a couple of very important, very foundational characteristics of successful traders. The first is the importance they place on intuition. Nearly all master traders assert that developing good intuition is essential for trading success. One trader likened this intuitive sense to essentially the same experience we have upon first meeting someone – If you meet someone and feel an immediate, strong liking for them, that first impression usually turns out to be right, and as you get to know them, you find that they are indeed quite likeable. (Conversely, there are those people about whom you just have an instinctive “bad feeling” right off the bat, from the moment you’re introduced to them – those intuitive reactions also often turn out to be correct, and when we ignore them, we do so at our own peril.)

The notably talented commodities trader, William Gallaher, once observed, “Over time, I began to realize that my first impression of a trade – whether it was ‘Yeah, that looks good’, or ‘Ehhh, that feels kind of sketchy’ – usually turned out to be right. In fact, my initial intuitive reaction to a trade often turned out to be a more reliable indicator of its success than hours of research I may have done on it.”

The second basic characteristic of winning traders is that they approach the market every day as an adventure, a journey whose end-of-day destination is unknown. They optimistically embrace the fresh day’s journey, confident in their ability to profit from it regardless of what it brings. The destination may be unknown, but the path can be gradually revealed to the trader who carefully watches the action unfold, and who quickly catches the clues to future market movement, and is ready to promptly take appropriate action. And the key to catching those clues lies in another precept of Zen – “seeing with clear vision” – that is, vision that isn’t clouded by preconceptions, desires, preferences or biases – the kind of vision that springs from a “don’t know mind”, or “beginner’s mind”. Another phrasing of this idea is expressed in the trading axiom, “Trade what you see, not what you expect”. All too often, we let what we think “ought” to happen obstruct our ability to clearly see what IS happening in the markets. We cling to our idea that a given currency pair is going up (or down), and either completely miss, or even worse – ignore, all the clues the market’s price action indicates to the contrary. We become overly attached to our opinions, or to trades that we’re already in, and this obscures our vision and prevents us from accurately seeing the unfolding price action.

Then, at the end of the day, when we’re out of the trade and therefore no longer personally invested in it, we’re suddenly able to see with astonishing clarity all the clues we missed, all the warnings that went unheeded. And in that clarity of light, we often shake our heads and marvel, “How could I have missed that?” Winning traders avoid such costly behavior by maintaining a “don’t know mind”. Taking things back to Zen practice, or broadening them out to the practice of life, I met a girl once (go figure, huh?) who purposely developed the habit of – whenever she noticed herself becoming particularly attached to an opinion or point of view – saying to herself, “I could be wrong”. (Later on, in true Zen kid fashion, she paradoxically added also saying, “I could be right”.) Master traders continually re-evaluate and question their assessment of the market, on guard against the possibility that “I could be wrong”.

“In spring, hundreds of flowers; in autumn, a harvest moon,

In the summer, a refreshing breeze; in winter, snow will accompany you.

If useless things do not hang in your mind, any season is a good season for you.” – Mumon

That quote from the collection of Zen koans, “The Gateless Gate”, is basically saying that as long as your mind is clear, and open to accepting the truth as it is revealed, then you can successfully handle whatever may come along. Likewise in trading – practicing clear vision and “don’t know mind”, you can trade profitably in any market conditions, or in response to any type of market movements.

So, just to sum up our Zen trading lessons for the day, the two keys to having the best possible mindset for successful trading:

1 – Approach each trading day as a journey whose destination is unknown, confident that you are well-prepared to profit from that journey; you’re not worried by the uncertainty, or afraid of losing money – Rather, you’re confident in your ability to intuitively react to the market’s unfolding path, and MAKE money

2 – Cultivate your intuition, your feel for the market, and learn to trust it to guide you in making the best possible trading decisions

Can intuition be learned or developed? Absolutely! Intuition, a “feel” for the markets, is the natural by-product of having done the necessary work to put together a trading strategy and trading plan that enables you to approach the markets with a sense of relaxed confidence – confidence that you have the necessary tools for consistently profitable trading. That sense of relaxation (not anxiety or worry) and confidence (not fear) frees you to be open to accurately receiving and evaluating the market information that will tip you off in regard to “good” and “bad” trades. Intuition is also developed and honed simply by the day to day practice of trading. The longer you trade, the more you develop a natural feel for the flow of market action, and the more easily you’re able to get a sense of bullish strength or bearish weakness.

In the weeks ahead, we’ll be examining the various aspects of trading psychology, focusing on learning how we can develop the characteristics and mindset of winning traders, and how we can overcome the mental and emotional obstacles that prevent losing traders from becoming winning traders. So stay tuned! And in the meantime, please comment and share your thoughts or ideas – thanks! You can find me on Twitter, in Facebook…or down at the racetrack trying to get a tip from a jockey.

Thanks so much for your comments – glad you dropped by! Keep the flow going and share this around.

Gerhard Wildies

Hi Jack, a fellow trader just mentioned your article. GREAT STUFF, as I am actually using a ZEN approach in adoption of Shaolin and Sunzi wisdoms for trading and actually published a german ebook on that in 2013. I strongly believe that to learn to life and cherish the moment will bring you ahead and by the way, not surprising that in the 80s a lot of professional traders went on the asian mental trip……

Thanks, Chris – I’m glad you liked it, and always glad to get your feedback and thoughts on things.

Allison

Awesome Jack, thanks for writing this! It is such a difficult subject that seems it should be so simple (hmm….like Zen, Tao etc, right?) Looking for repeatable patterns that don’t always repeat and accepting what we’re dealt….
Can’t wait to see the next installment!

Chris

Excellent article!!! Thanks for the great insight. Your comparison with a journey is really good in
my opinion because it shows the adaptability and lack of fear needed.

Its better to be quick on our feet, have a flexibile mindset and approach the
market with a well balanced confidence but also respective of the fact that the
market has a lot of insecurity.

Disclaimer: Trading forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

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